The Principles of Political Economy, by John Stuart Mill

Chapter 2

On the General Principles of Taxation

§1. The qualities desirable, economically speaking, in a system of taxation, have been embodied by Adam Smith in
four maxims or principles, which, having been generally concurred by subsequent writers, may be said to have become
classical, and this chapter cannot be better commenced than by quoting them.1

‘1. The subjects of every state ought to contribute to the support of the government, as nearly as possible in
proportion to their respective abilities: that is, in proportion to the revenue which they respectively enjoy under the
protection of the state. In the observation or neglect of this maxim consists what is called the equality or inequality
of taxation.

‘2. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the
manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other
person. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax-gatherer,
who can either aggravate the tax upon any obnoxious contributor, or extort by the terror of such aggravation, some
present or perquisite to himself. The uncertainty of taxation encourages the insolence and favours the corruption of an
order of men who are naturally unpopular, even when they are neither insolent nor corrupt. The certainty of what each
individual ought to pay is, in taxation, a matter of so great importance, that a very considerable degree of
inequality, it appears, I believe, from the experience of all nations, is not near so great an evil, as a very small
degree of uncertainty.

‘3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the
contributor to pay it. A tax upon the rent of land or of houses, payable at the same term at which such rents are
usually paid, is levied at a time when it is most likely to be convenient for the contributor to pay; or when he is
most likely to have wherewithal to pay. Taxes upon such consumable goods as are articles of luxury, are all finally
paid by the consumer, and generally in a manner that is very convenient to him. He pays them by little and little, as
he has occasion to buy the goods. As he is at liberty, too, either to buy or not to buy, as he pleases, it must be his
own fault if he ever suffers any considerable inconvenience from such taxes.

‘4. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as
possible over and above what it brings into the public treasury of the state. A tax may either take out or keep out of
the pockets of the people a great deal more than it brings into the public treasury, in the four following ways. First,
the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of
the tax, and whose perquisites may impose another additional tax upon the people. Secondly, it may divert a portion of
the labour and capital of the community from a more to a less productive employment. Thirdly, by the forfeitures and
other penalties which those unfortunate individuals incur who attempt unsuccessfully to evade the tax, it may
frequently ruin them, and thereby put an end to the benefit which the community might have derived from the employment
of their capitals. An injudicious tax offers a great temptation to smuggling. Fourthly, by subjecting the people to the
frequent visits and the odious examination of the tax-gatherers, it may expose them to much unnecessary trouble,
vexation, and oppression’: to which may be added, that the restrictive regulations to which trades and manufactures are
often subjected to prevent evasion of a tax, are not only in themselves troublesome and expensive, but often oppose
insuperable obstacles to making improvements in the processes. The last three of these four maxims require little other
explanation or illustration than is contained in the passage itself. How far any given tax conforms to, or conflicts
with them, is a matter to be considered in the discussion of particular taxes. But the first of the four points,
equality of taxation, requires to be more fully examined, being a thing often imperfectly understood, and on which many
false notions have become to a certain degree accredited, through the absence of any definite principles of judgment in
the popular mind.

§2. For what reason ought equality to be the rule in matters of taxation? For the reason, that it ought to be so in
all affairs of government. As a government ought to make no distinction of persons or classes in the strength of their
claims on it, whatever sacrifices it requires from them should be made to bear as nearly as possible with the same
pressure upon all, which, it must be observed, is the mode by which least sacrifice is occasioned on the whole. If any
one bears less than his fair share of the burthen, some other person must suffer more than his share, and the
alleviation to the one is not, caeteris paribus, so great a good to him, as the increased pressure upon the other is an
evil. Equality of taxation, therefore, as a maxim of politics, means equality of sacrifice. It means apportioning the
contribution of each person towards the expenses of government, so that he shall feel neither more nor less
inconvenience from his share of the payment than every other person experiences from his. This standard, like other
standards of perfection, cannot be completely realized; but the first object in every practical discussion should be to
know what perfection is.

There are persons, however, who are not content with the general principles of justice as a basis to ground a rule
of finance upon, but must have something, as they think, more specifically appropriate to the subject. What best
pleases them is, to regard the taxes paid by each member of the community as an equivalent for value received, in the
shape of service to himself; and they prefer to rest the justice of making each contribute in proportion to his means,
upon the ground, that he who has twice as much property to be protected, receives, on an accurate calculation, twice as
much protection, and ought, on the principles of bargain and sale, to pay twice as much for it. Since, however, the
assumption that government exists solely for the protection of property, is not one to be deliberately adhered to; some
consistent adherents of the quid pro quo principle go on to observe, that protection being required for person as well
as property, and everybody’s person receiving the same amount of protection, a poll-tax of a fixed sum per head is a
proper equivalent for this part of the benefits of government, while the remaining part, protection to property, should
be paid for in proportion to property. There is in this adjustment a false air of nice adaptation, very acceptable to
some minds. But in the first place, it is not admissible that the protection of persons and that of property are the
sole purposes of government. The ends of government are as comprehensive as those of the social union. They consist of
all the good, and all the immunity from evil, which the existence of government can be made either directly or
indirectly to bestow. In the second place, the practice of setting definite values on things essentially indefinite,
and making them a ground of practical conclusions, is peculiarly fertile in false views of social questions. It cannot
be admitted, that to be protected in the ownership of ten times as much property, is to be ten times as much protected.
Neither can it be truly said that the protection of 1000l. a year costs the state ten times as much as that of 100l. a
year, rather than twice as much, or exactly as much. The same judges, soldiers, and sailors who protect the one protect
the other, and the larger income does not necessarily, though it may sometimes, require even more policemen. Whether
the labour and expense of the protection, or the feelings of the protected person, or any other definite thing be made
the standard, there is no such proportion as the one supposed, nor any other definable proportion. If we wanted to
estimate the degrees of benefit which different persons derive from the protection of government, we should have to
consider who would suffer most if that protection were withdrawn: to which question if any answer could be made, it
must be, that those would suffer most who were weakest in mind or body, either by nature or by position. Indeed, such
persons would almost infallibly be slaves. If there were any justice, therefore, in the theory of justice now under
consideration, those who are least capable of helping or defending themselves, being those to whom the protection of
government is the most indispensable, ought to pay the greatest share of its price: the reverse of the true idea of
distributive justice, which consists not in imitating but in redressing the inequalities and wrongs of nature.

Government must be regarded as so pre.eminently a concern of all, that to determine who are most interested in it is
of no real importance. If a person or class of persons receive so small a share of the benefit as makes it necessary to
raise the question, there is something else than taxation which is amiss, and the thing to be done is to remedy the
defect, instead of recognizing it and making it a ground for demanding less taxes. As, in a case of voluntary
subscription for a purpose in which all are interested, all are thought to have done their part fairly when each has
contributed according to his means, that is, has made an equal sacrifice for the common object; in like manner should
this be the principle of compulsory contributions: and it is superfluous to look for a more ingenious or recondite
ground to rest the principle upon.

§3. Setting out, then, from the maxim that equal sacrifices ought to be demanded from all, we have next to inquire
whether this is in fact done, by making each contribute the same percentage on his pecuniary means. Many persons
maintain the negative, saying that a tenth part taken from a small income is a heavier burthen than the same fraction
deducted from one much larger: and on this is grounded the very popular scheme of what is called a graduated property
tax, viz. an income tax in which the percentage rises with the amount of the income.

On the best consideration I am able to give to this question, it appears to me that the portion of truth which the
doctrine contains, arises principally from the difference between a tax which can be saved from luxuries, and one which
trenches, in ever so small a degree, upon the necessaries of life. To take a thousand a year from the possessor of ten
thousand, would not deprive him of anything really conducive either to the support or to the comfort of existence; and
if such would be the effect of taking five pounds from one whose income is fifty, the sacrifice required from the last
is not only greater than, but entirely incommensurable with, that imposed upon the first. The mode of adjusting these
inequalities of pressure, which seems to be the most equitable, is that recommended by Bentham, of leaving a certain
minimum of income, sufficient to provide the necessaries of life, untaxed. Suppose 50l. a year to be sufficient to
provide the number of persons ordinarily supported from a single income, with the requisites of life and health, and
with protection against habitual bodily suffering, but not with any indulgence. This then should be made the minimum,
and incomes exceeding it should pay taxes not upon their whole amount, but upon the surplus. If the tax be ten per
cent, an income of 60l. should be considered as a net income of 10l., and charged with 1l. a year, while an income of
1000l. should be charged as one of 950l. Each would then pay a fixed proportion, not of his whole means, but of his
superfluities.2 An income not exceeding 50l. should not be taxed at
all, either directly or by taxes on necessaries; for as by supposition this is the smallest income which labour ought
to be able to command, the government ought not to be a party to making it smaller. This arrangement however would
constitute a reason, in addition to others which might be stated, for maintaining taxes on articles of luxury consumed
by the poor. The immunity extended to the income required for necessaries, should depend on its being actually expended
for that purpose; and the poor who, not having more than enough for necessaries, divert any part of it to indulgences,
should like other people contribute their quota out of those indulgences to the expenses of the state.

The exemption in favour of the smaller incomes should not, I think, be stretched further than to the amount of
income needful for life, health, and immunity from bodily pain. If 50l. a year is sufficient (which may be doubted) for
these purposes, an income of 100l. a year would, as it seems to me, obtain al1 the relief it is entitled to, compared
with one of 1000l., by being taxed only on 50l. of its amount. It may be said, indeed, that to take 100l. from 1000l.
(even giving back five pounds) is a heavier impost than 1000l. taken from 10,000l. (giving back the same five pounds).
But this doctrine seems to me too disputable altogether, and even if true at all, not true to a sufficient extent, to
be made the foundation of any rule of taxation. Whether the person with 10,000l. a year cares less for 1000l. than the
person with only 1000l. a year cares for 100l., and if so, how much less, does not appear to me capable of being
decided with the degree of certainty on which a legislator or a financier ought to act.

Some indeed contend that the rule of proportional taxation bears harder upon the moderate than upon the large
incomes, because the same proportional payment has more tendency in the former case than in the latter, to reduce the
payer to a lower grade of social rank. The fact appears to me more than questionable. But even admitting it, I object
to its being considered incumbent on government to shape its course by such considerations, or to recognize the notion
that social importance is or can be determined by amount of expenditure. Government ought to set an example of rating
all things at their true value, and riches, therefore, at the worth, for comfort or pleasure, of the things which they
will buy: and ought not to sanction the vulgarity of prizing them for the pitiful vanity of being known to possess
them, or the paltry shame of being suspected to be without them, the presiding motives of three-fourths of the
expenditure of the middle classes. The sacrifices of real comfort or indulgence which government requires, it is bound
to apportion among all persons with as much equality as possible; but their sacrifices of the imaginary dignity
dependent on expense, it may spare itself the trouble of estimating.

Both in England and on the Continent a graduated property tax (l’impot progressif) has been advocated, on the avowed
ground that the state should use the instrument of taxation as a means of mitigating the inequalities of wealth. I am
as desirous as any one, that means should be taken to diminish those inequalities, but not so as to relieve the
prodigal at the expense of the prudent. To tax the larger incomes at a higher percentage than the smaller, is to lay a
tax on industry and economy; to impose a penalty on people for having worked harder and saved more than their
neighbours. It is not the fortunes which are earned, but those which are unearned, that it is for the public good to
place under limitation. A just and wise legislation would abstain from holding out motives for dissipating rather than
saving the earnings of honest exertion. Its impartiality between competitors would consist in endeavouring that they
should all start fair, and not in hanging a weight upon the swift to diminish the distance between them and the slow.
Many, indeed, fail with greater efforts than those with which others succeed, not from difference of merits, but
difference of opportunities; but if all were done which it would be in the power of a good government to do, by
instruction and by legislation, to diminish this inequality of opportunities, the differences of fortune arising from
people’s own earnings could not justly give umbrage. With respect to the large fortunes acquired by gift or
inheritance, the power of bequeathing is one of those privileges of property which are fit subjects for regulation on
grounds of general expediency; and I have already suggested, as a possible mode of restraining the accumulation of
large fortunes in the hands of those who have not earned them by exertion, a limitation of the amount which any one
person should be permitted to acquire by gift, bequest, or inheritance. Apart from this, and from the proposal of
Bentham (also discussed in a former chapter) that collateral inheritance ab intestato should cease, and the property
escheat to the state, I conceive that inheritances and legacies, exceeding a certain amount, are highly proper subjects
for taxation: and that the revenue from them should be as great as it can be made without giving rise to evasions, by
donation inter vivos or concealment of property, such as it would be impossible adequately to check. The principle of
graduation (as it is called,) that is, of levying a larger percentage on a larger sum, though its application to
general taxation would be in my opinion objectionable, seems to me both just and expedient as applied to legacy and
inheritance duties.

The objection to a graduated property tax applies in an aggravated degree to the proposition of an exclusive tax on
what is called ‘realized property’, that is, property not forming a part of any capital engaged in business, or rather
in business under the superintendence of the owner: as land, the public funds, money lent on mortgage, and shares (I
presume) in joint-stock companies. Except the proposal of applying a sponge to the national debt, no such palpable
violation of common honesty has found sufficient support in this country, during the present generation, to be regarded
as within the domain of discussion. It has not the palliation of a graduated property tax, that of lay. ing the burthen
on those best able to bear it; for ‘realized property’ includes the far larger portion of the provision made for those
who are unable to work, and consists, in great part, of extremely small fractions. I can hardly conceive a more
shameless pretension, than that the major part of the property of the country, that of merchants, manufacturers,
farmers, and shopkeepers, should be exempted from its share of taxation; that these classes should only begin to pay
their proportion after retiring from business, and if they never retire should be excused from it altogether. But even
this does not give an adequate idea of the injustice of the proposition. The burthen thus exclusively thrown on the
owners of the smaller portion of the wealth of the community, would not even be a burthen on that class of persons in
perpetual succession, but would fall exclusively on those who happened to compose it when the tax was laid on. As land
and those particular securities would thenceforth yield a smaller net income, relatively to the general interest of
capital and to the profits of trade; the balance would rectify itself by a permanent depreciation of those kinds of
property. Future buyers would acquire land and securities at a reduction of price, equivalent to the peculiar tax,
which tax they would, therefore, escape from paying; while the original possessors would remain burthened with it even
after parting with the property, since they would have sold their land or securities at a loss of value equivalent to
the fee-simple of the tax. Its imposition would thus be tantamount to the confiscation for public uses of a percentage
of their property, equal to the percentage laid on their income by the tax. That such a proposition should find any
favour, is a striking instance of the want of conscience in matters of taxation, resulting from the absence of any
fixed principles in the public mind, and of any indication of a sense of justice on the subject in the general conduct
of governments. Should the scheme ever enlist a large party in its support, the fact would indicate a laxity of
pecuniary integrity in national affairs, scarcely inferior to American repudiation.

§4. Whether the profits of trade may not rightfully be taxed at a lower rate than incomes derived from interest or
rent, is part of the more comprehensive question, so often mooted on the occasion of the present income tax, whether
life incomes should be subjected to the same rate of taxation as perpetual incomes: whether salaries, for example, or
annuities, or the gains of professions, should pay the same percentage as the income from inheritable property.

The existing tax treats all kinds of incomes exactly alike, taking its sevenpence (now fourpence) in the pound, as
well from the person whose income dies with him, as from the landholder, stockholder, or mortgagee, who can transmit
his fortune undiminished to his descendants. This is a visible injustice: yet it does not arithmetically violate the
rule that taxation ought to be in proportion to means. When it is said that a temporary income ought to be taxed less
than a permanent one, the reply is irresistible, that it is taxed less; for the income which lasts only ten years pays
the tax only ten years, while that which lasts for ever pays for ever. On this point some financial reformers are
guilty of a great fallacy. They contend that incomes ought to be assessed to the income tax not in proportion to their
annual amount, but to their capitalized value: that, for example, if the value of a perpetual annuity of 100l. is
3000l., and a life annuity of the same amount, being worth only half the number of years’ purchase, could only be sold
for 1500l., the perpetual income should pay twice as much per cent income tax as the terminable income; if the one pays
10l. a year the other should pay only 5l. But in this argument there is the obvious oversight, that it values the
incomes by one standard and the payments by another; it capitalizes the incomes, but forgets to capitalize the
payments. An annuity worth 3000l. ought, it is alleged, to be taxed twice as highly as one which is only worth 1500l.,
and no assertion can be more unquestionable; but it is forgotten that the income worth 3000l. pays to the supposed
income tax 10l. a year in perpetuity, which is equivalent, by supposition, to 300l., while the terminable income pays
the same 10l. only during the life of its owner, which on the same calculation is a value of 150l., and could actually
be bought for that sum. Already, therefore, the income which is only half as valuable, pays only half as much to the
tax; and if in addition to this its annual quota were reduced from 10l. to 5l., it would pay, not half, but a fourth
part only of the payment demanded from the perpetual income. To make it just that the one income should pay only half
as much per annum as the other, it would be necessary that it should pay that half for the same period, that is, in
perpetuity.

The rule of payment which this school of financial reformers contend for, would be very proper if the tax were only
to be levied once, to meet some national emergency. On the principle of requiring from all payers an equal sacrifice,
every person who had anything belonging to him, reversioners included, would be called on for a payment proportioned to
the present value of his property. I wonder it does not occur to the reformers in question, that precisely because this
principle of assessment would be just in the case of a payment made once for all, it cannot possibly be just for a
permanent tax. When each pays only once, one person pays no oftener than another. and the proportion which would be
just in that case, cannot also be just if one person has to make the payment only once, and the other several times.
This, however, is the type of the case which actually occurs. The permanent incomes pay the tax as much oftener than
the temporary ones, as a perpetuity exceeds the certain or uncertain length of time which forms the duration of the
income for life or years.

All attempts to establish a claim in favour of terminable incomes on numerical grounds — to make out, in short, that
a proportional tax is not a proportional tax — are manifestly absurd. The claim does not rest on grounds of arithmetic,
but of human wants and feelings. It is not because the temporary annuitant has smaller means, but because he has
greater necessities, that he ought to be assessed at a lower rate.

In spite of the nominal equality of income, A, an annuitant of 1000l. a year, cannot so well afford to pay 100l. out
of it, as B who derives the same annual sum from heritable property; A having usually a demand on his income which B
has not, namely, to provide by saving for children or others; to which, in the case of salaries or professional gains,
must generally be added a provision for his own later years; while B may expend his whole income without injury to his
old age, and still have it all to bestow on others after his death. If A, in order to meet these exigencies, must lay
by 300l. of his income, to take 100l. from him as income tax is to take 100l. from 700l., since it must be retrenched
from that part only of his means which he can afford to spend on his own consumption. Were he to throw it rateably on
what he spends and on what he saves, abating 70l. from his consumption and 30l. from his annual saving, then indeed his
immediate sacrifice would be proportionately the same as B’s: but then his children or his old age would be worse
provided for in consequence of the tax. The capital sum which would be accumulated for them would be one-tenth less,
and on the reduced income afforded by this reduced capital, they would be a second time charged with income tax; while
B’s heirs would only be charged once.

The principle, therefore, of equality of taxation, interpreted in its only just sense, equality of sacrifice,
requires that a person who has no means of providing for old age, or for those in whom he is interested, except by
saving from income, should have the tax remitted on all that part of his income which is really and bona fide applied
to that purpose.

If, indeed, reliance could be placed on the conscience of the contributors, or sufficient security taken for the
correctness of their statements by collateral precautions, the proper mode of assessing an income tax would be to tax
only the part of income devoted to expenditure, exempting that which is saved. For when saved and invested (and all
savings, speaking generally, are invested) it thenceforth pays income tax on the interest or profit which it brings,
notwithstanding that it has already been taxed on the principal. Unless, therefore, savings are exempted from income
tax, the contributors are twice taxed on what they save, and only once on what they spend. A person who spends all he
receives, pays 7d. in the pound, or say three per cent, to the tax, and no more; but if he saves part of the year’s
income and buys stock, then in addition to the three per cent which he has paid on the principal, and which diminishes
the interest in the same ratio, he pays three per cent annually on the interest itself, which is equivalent to an
immediate payment of a second three per cent on the principal. So that while unproductive expenditure pays only three
per cent, savings pay six per cent: or more correctly, three per cent on the whole, and another three per cent on the
remaining ninety-seven. The difference thus created to the disadvantage of prudence and economy, is not only impolitic
but unjust. To tax the sum invested, and afterwards tax also the proceeds of the investment, is to tax the same portion
of the contributor’s means twice over. The principal and the interest cannot both together form part of his resources;
they are the same portion twice counted: if he has the interest, it is because he abstains from using the principal; if
he spends the principal, he does not receive the interest. Yet because he can do either of the two, he is taxed as if
he could do both, and could have the benefit of the saving and that of the spending, concurrently with one another.

It has been urged as an objection to exempting savings from taxation, that the law ought not to disturb, by
artificial interference, the natural competition between the motives for saving and those for spending. But we have
seen that the law disturbs this natural competition when it taxes savings, not when it spares them; for as the savings
pay at any rate the full tax as soon as they are invested, their exemption from payment in the earlier stage is
necessary to prevent them from paying twice, while money spent in unproductive consumption pays only once. It has been
further objected, that since the rich have the greatest means of saving, any privilege given to savings is an advantage
bestowed on the rich at the expense of the poor. I answer, that it is bestowed on them only in proportion as they
abdicate the personal use of their riches; in proportion as they divert their income from the supply of their own
wants, to a productive investment, through which, instead of being consumed by themselves, it is distributed in wages
among the poor. If this be favouring the rich, I should like to have it pointed out, what mode of assessing taxation
can deserve the name of favouring the poor.

No income tax is really just, from which savings are not exempted; and no income tax ought to be voted without that
provision, if the form of the returns, and the nature of the evidence required, could be so arranged as to prevent the
exemption from being taken fraudulent advantage of, by saving with one hand and getting into debt with the other, or by
spending in the following year what had been passed tax-free as saving in the year preceding. If this difficulty could
be surmounted, the difficulties and complexities arising from the comparative claims of temporary and permanent
incomes, would disappear; for, since temporary incomes have no just claim to lighter taxation than permanent incomes,
except in so far as their possessors are more called upon to save, the exemption of what they do save would fully
satisfy the claim. But if no plan can be devised for the exemption of actual savings, sufficiently free from liability
to fraud, it is necessary, as the next thing in point of justice, to take into account in assessing the tax, what the
different classes of contributors ought to save. And there would probably be no other mode of doing this than the rough
expedient of two different rates of assessment. There would be great difficulty in taking into account differences of
duration between one terminable income and another; and in the most frequent case, that of incomes dependent on life,
differences of age and health would constitute such extreme diversity as it would be impossible to take proper
cognizance of. It would probably be necessary to be content with one uniform rate for all incomes of inheritance, and
another uniform rate for all those which necessarily terminate with the life of the individual. In fixing the
proportion between the two rates, there must inevitably be something arbitrary; perhaps a deduction of one-fourth in
favour of life-incomes would be as little objectionable as any which could be made, it being thus assumed that
one-fourth of a life-income is, on the average of all ages and states of health, a suitable proportion to be laid by as
a provision for successors and for old age.3

Of the net profits of persons in business, a part, as before observed, may be considered as interest on capital, and
of a perpetual character, and the remaining part as remuneration for the skill and labour of superintendence. The
surplus beyond interest depends on the life of the individual, and even on his continuance in business, and is entitled
to the full amount of exemption allowed to terminable incomes. It has also, I conceive, a just claim to a further
amount of exemption in consideration of its precariousness. An income which some not unusual vicissitude may reduce to
nothing, or even convert into a loss, is not the same thing to the feelings of the possessor as a permanent income of
1000l. a year, even though on an average of years it may yield 1000l. a year. If life.incomes were assessed at
three-fourths of their amount, the profits of business, after deducting interest on capital, should not only be
assessed at three-fourths, but should pay, on that assessment, a lower rate. Or perhaps the claims of justice in this
respect might be sufficiently met by allowing the deduction of a fourth on the entire income, interest included.

These are the chief cases, of ordinary occurrence, in which any difficulty arises in interpreting the maxim of
equality of taxation. The proper sense to be put upon it, as we have seen in the preceding example, is, that people
should be taxed, not in proportion to what they have, but to what they can afford to spend. It is no objection to this
principle that we cannot apply it consistently to all cases. A person with a life-income and precarious health, or who
has many persons depending on his exertions, must, if he wishes to provide for them after his death, be more rigidly
economical than one who has a life-income of equal amount, with a strong constitution, and few claims upon him; and if
it be conceded that taxation cannot accommodate itself to these distinctions, it is argued that there is no use in
attending to any distinctions, where the absolute amount of income is the same. But the difficulty of doing perfect
justice is no reason against doing as much as we can. Though it may be a hardship to an annuitant whose life is only
worth five years’ purchase, to be allowed no greater abatement than is granted to one whose life is worth twenty, it is
better for him even so, than if neither of them were allowed any abatement at all.

§5. Before leaving the subject of Equality of Taxation, I must remark that there are cases in which exceptions may
be made to it, consistently with that equal justice which is the groundwork of the rule. Suppose that there is a kind
of income which constantly tends to increase, without any exertion or sacrifice on the part of the owners: those owners
constituting a class in the community, whom the natural course of things progressively enriches, consistently with
complete passiveness on their own part. In such a case it would be no violation of the principles on which private
property is grounded, if the state should appropriate this increase of wealth, or part of it, as it arises. This would
not properly be taking anything from anybody; it would merely be applying an accession of wealth, created by
circumstances, to the benefit of society, instead of allowing it to become an unearned appendage to the riches of a
particular class.

Now this is actually the case with rent. The ordinary progress of a society which increases in wealth, is at all
times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the
wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were in
their sleep, without working, risking, or economizing. What claim have they, on the general principle of social
justice, to this accession of riches? In what would they have been wronged if society had, from the beginning, reserved
the right of taxing the spontaneous increase of rent, to the highest amount required by financial exigencies? I admit
that it would be unjust to come upon each individual estate, and lay hold of the increase which might be found to have
taken place in its rental; because there would be no means of distinguishing in individual cases, between an increase
owing solely to the general circumstances of society, and one which was the effect of skill and expenditure on the part
of the proprietor. The only admissible mode of proceeding would be by a general measure. The first step should be a
valuation of all the land in the country. The present value of all land should be exempt from the tax; but after an
interval had elapsed, during which society had increased in population and capital, a rough estimate might be made of
the spontaneous increase which had accrued to rent since the valuation was made. Of this the average price of produce
would be some criterion: if that had risen, it would be certain that rent had increased, and (as already shown) even in
a greater ratio than the rise of price. On this and other data, an approximate estimate might be made, how much value
had been added to the land of the country by natural causes; and in laying on a general land-tax, which for fear of
miscalculation should be considerably within the amount thus indicated, there would be an assurance of not touching any
increase of income which might be the result of capital expended or industry exerted by the proprietor.

But though there could be no question as to the justice of taxing the increase of rent, if society had avowedly
reserved the right, has not society waived that right by not exercising it? In England, for example, have not all who
bought land for the last century or more, given value not only for the existing income, but for the prospects of
increase, under an implied assurance of being only taxed in the same proportion with other incomes? This objection, in
so far as valid, has a different degree of validity in different countries; depending on the degree of desuetude into
which society has allowed a right to fall, which, as no one can doubt, it once fully possessed. In most countries of
Europe, the right to take by taxation, as exigency might require, an indefinite portion of the rent of land, has never
been allowed to slumber. In several parts of the Continent, the land-tax forms a large proportion of the public
revenues, and has always been confessedly liable to be raised or lowered without reference to other taxes. In these
countries no one can pretend to have become the owner of land on the faith of never being called upon to pay an
increased land-tax. In England the land-tax has not varied since the early part of the last century. The last act of
the legislature in relation to its amount, was to diminish it; and though the subsequent increase in the rental of the
country has been immense, not only from agriculture, but from the growth of towns and the increase of buildings, the
ascendancy of landholders in the legislature has prevented any tax from being imposed, as it so justly might, upon the
very large portion of this increase which was unearned, and, as it were, accidental. For the expectations thus raised,
it appears to me that an amply sufficient allowance is made, if the whole increase of income which has accrued during
this long period from a mere natural law, without exertion or sacrifice, is held sacred from any peculiar taxation.
From the present date, or any subsequent time at which the legislature may think fit to assert the principle, I see no
objection to declaring that the future increment of rent should be liable to special taxation; in doing which all
injustice to the landlords would be obviated, if the present market-price of their land were secured to them; since
that includes the present value of all future expectations. With reference to such a tax, perhaps a safer criterion
than either a rise of rents or a rise of the price of corn, would be a general rise in the price of land. It would be
easy to keep the tax within the amount which would reduce the market value of land below the original valuation: and up
to that point, whatever the amount of the tax might be, no injustice would be done to the proprietors.

§6. But whatever may be thought of the legitimacy of making the State a sharer in all future increase of rent from
natural causes, the existing land-tax (which in this country unfortunately is very small) ought not to be regarded as a
tax, but as a rent-charge in favour of the public; a portion of the rent, reserved from the beginning by the State,
which has never belonged to or formed part of the income of the landlords, and should not therefore be counted to them
as part of their taxation, so as to exempt them from their fair share of every other tax. As well might the tithe be
regarded as a tax on the landlords: as well, in Bengal, where the State, though entitled to the whole rent of the land,
gave away one-tenth of it to individuals, retaining the other nine-tenths, might those nine-tenths be considered as an
unequal and unjust tax on the grantees of the tenth. That a person owns part of the rent, does not make the rest of it
his just right, injuriously withheld from him. The landlords originally held their estates subject to feudal burthens,
for which the present land-tax is an exceedingly small equivalent, and for their relief from which they should have
been required to pay a much higher price. All who have bought land since the tax existed have bought it subject to the
tax. There is not the smallest pretence for looking upon it as a payment exacted from the existing race of
landlords.

These observations are applicable to a land-tax, only in so far as it is a peculiar tax, and not when it is merely a
mode of levying from the landlords the equivalent of what is taken from other classes. In France, for example, there
are peculiar taxes on other kinds of property and income (the mobilier and the patente), and supposing the land-tax to
be not more than equivalent to these, there would be no ground for contending that the State had reserved to itself a
rent-charge on the land. But wherever and in so far as income derived from land is prescriptively subject to a
deduction for public purposes, beyond the rate of taxation levied on other incomes, the surplus is not properly
taxation, but a share of the property in the soil, reserved by the state. In this country there are no peculiar taxes
on other classes, corresponding to, or intended to countervail, the land-tax. The whole of it, therefore, is not
taxation, but a rent-charge, and is as if the state had retained, not a portion of the rent, but a portion of the land.
It is no more a burthen on the landlord, than the share of one joint tenant is a burthen on the other. The landlords
are entitled to no compensation for it, nor have they any claim to its being allowed for, as part of their taxes. Its
continuance on the existing footing is no infringement of the principle of Equal Taxation.4

We shall hereafter consider, in treating of Indirect Taxation, how far, and with what modifications, the rule of
equality is applicable to that department.

§7. In addition to the preceding rules, another general rule of taxation is sometimes laid down, namely, that it
should fall on income, and not on capital. That taxation should not encroach upon the amount of the national capital,
is indeed of the greatest importance; but this encroachment, when it occurs, is not so much a consequence of any
particular mode of taxation, as of its excessive amount. Over-taxation, carried to a sufficient extent, is quite
capable of ruining the most industrious community, especially when it is in any degree arbitrary, so that the payer is
never certain how much or how little he shall be allowed to keep; or when it is so laid on as to render industry and
economy a bad calculation. But if these errors be avoided, and the amount of taxation be not greater than it is at
present even in the most heavily taxed country of Europe, there is no danger lest it should deprive the country of a
portion of its capital.

To provide that taxation shall fall entirely on income, and not at all on capital, is beyond the power of any system
of fiscal arrangements. There is no tax which is not partly paid from what would otherwise have been saved; no tax, the
amount of which, if remitted, would be wholly employed in increased expenditure, and no part whatever laid by as an
addition to capital. All taxes, therefore, are in some sense partly paid out of capital; and in a poor country it is
impossible to impose any tax which will not impede the increase of the national wealth. But in a country where capital
abounds, and the spirit of accumulation is strong, this effect of taxation is scarcely felt. Capital having reached the
stage in which, were it not for a perpetual succession of improvements in production, any further increase would soon
be stopped — and having so strong a tendency even to outrun those improvements, that profits are only kept above the
minimum by emigration of capital, or by a periodical sweep called a commercial crisis; to take from capital by taxation
what emigration would remove, or a commercial crisis destroy, is only to do what either of those causes would have
done, namely, to make a clear space for further saving.

I cannot, therefore, attach any importance, in a wealthy country, to the objection made against taxes on legacies
and inheritances, that they are taxes on capital. It is perfectly true that they are so. As Ricardo observes, if 100l.
are taken from any one in a tax on houses or on wine, he will probably save it, or a part of it, by living in a cheaper
house, consuming less wine, or retrenching from some other of his expenses; but if the same sum be taken from him
because he has received a legacy of l000l., he considers the legacy as only 900l., and feels no more inducement than at
any other time (probably feels rather less inducement) to economize in his expenditure. The tax, therefore, is wholly
paid out of capital: and there are countries in which this would be a serious objection. But in the first place, the
argument cannot apply to any country which has a national debt, and devotes any portion of revenue to paying it off;
since the produce of the tax, thus applied, still remains capital, and is merely transferred from the taxpayer to the
fundholder. But the objection is never applicable in a country which increases rapidly in wealth. The amount which
would be derived, even from a very high legacy duty, in each year, is but a small fraction of the annual increase of
capital in such a country; and its abstraction would but make room for saving to an equivalent amount: while the effect
of not taking it, is to prevent that amount of saving, or cause the savings, when made, to be sent abroad for
investment. A country which, like England, accumulates capital not only for itself, but for half the world, may be said
to defray the whole of its public expenses from its overflowings; and its wealth is probably at this moment as great as
if it had no taxes at all. What its taxes really do is, to subtract from its means, not of production, but of
enjoyment; since whatever any one pays in taxes, he could, if it were not taken for that purpose, employ in indulging
his ease, or in gratifying some want or taste which at present remains unsatisfied.

2 This principle of assessment has been partially adopted by Mr
Gladstone in renewing the income-tax. From 100l., at which the tax begins, up to 200l., the income only pays tax on the
excess above 60l.

3 Mr Hubbard, the first person who, as a practical legislator, has
attempted the rectification of the income tax on principles of unimpeachable justice, and whose well-conceived plan
wants little of being as near an approximation to a just assessment as it is likely that means could be found of
carrying into practical effect, proposes a deduction not of a fourth but of a third, in favour of industrial and
professional incomes. He fixes on this ratio, on the ground that, independently of all consideration as to what the
industrial and professional classes ought to save, the attainable evidence goes to prove that a third of their incomes
is what on an average they do save, over and above the proportion saved by other classes. ‘The savings’ (Mr Hubbard
observes) ‘effected out of incomes derived from invested property are estimated at one-tenth. The savings effected out
of industrial incomes are estimated at four-tenths. The amounts which would be assessed under these two classes being
nearly equal, the adjustment is simplified by striking off one-tenth on either side, and then reducing by three-tenths,
or one.third, the assessable amount of industrial incomes.’ Proposed Report (p. xiv of the Report and Evidence of the
Committee of 1861). In such an estimate there must be a large element of conjecture; but in so far as it can be
substantiated, it affords a valid ground for the practical conclusion which Mr Hubbard founds on it.

Several writers on the subject, including Mr Mill in his Elements of Political Economy, and Mr M’Culloch in his work
on Taxation, have contended that as much should be deducted as would be sufficient to insure the possessor’s life for a
sum which would give to his successors for ever an income equal to what he reserves for himself; since this is what the
possessor of heritable property can do without saving at all: in other words, that temporary incomes should be
converted into perpetual incomes of equal present value, and taxed as such. If the owners of life-incomes actually did
save this large proportion of their income, or even a still larger. I would gladly grant them an exemption from
taxation on the whole amount, since, if practical means could be found of doing it, I would exempt savings altogether.
But I cannot admit that they have a claim to exemption on the general assumption of their being obliged to save this
amount. Owners of life-incomes are not bound to forego the enjoyment of them for the sake of leaving to a perpetual
line of successors an independent provision equal to their own temporary one; and no one ever dreams of doing so. Least
of all is it to be required or expected from those whose incomes are the fruits of personal exertion, that they should
leave to their posterity for ever, without any necessity for exertion, the same incomes which they allow to themselves.
All they are bound to do, even for their children, is to place them in circumstances in which they will have favourable
chances of earning their own living. To give, however, either to children or to others, by bequest, being a legitimate
inclination, which these persons cannot indulge without laying by a part of their income, while the owners of heritable
property can; this real inequality in cases where the incomes themselves are equal, should be considered, to a
reasonable degree, in the adjustment of taxation, so as to require from both, as nearly as practicable, an equal
sacrifice.

4 The same remarks obviously apply to those local taxes, of the
peculiar pressure of which on landed property so much has been said by the remnant of the Protectionists. As much of
these burthrens as is of old standing, ought to be regarded as a prescriptive deduction or reservation, for public
purposes, of a portion of the rent. And any recent additions have either been incurred for the benefit of the owners of
landed property, or occasioned by their fault: in neither case giving them any just ground of complaint.